Many companies require that employees, clients, and other relations perform transaction compliance checks before they trade in securities. Financial institutions, law firms, corporations, and other types of entities often are in possession of confidential information that relates to the value of a security. Depending upon the employee's position and the company's knowledge, the employee should not be allowed to make certain transactions because the employee may have knowledge which would give an unfair trading advantage. Similar restrictions can apply to clients of the company and to transactions made on behalf of the company itself. Transaction restrictions are generally imposed for legal reasons or on policy grounds, e.g., because the transaction would give the appearance of impropriety.
Conventionally, such a company will employ at least one trade compliance officer (“TCO”) who is responsible for ensuring that no illegal or improper transactions are made by company employees, customers, or on behalf of the company itself. For example, an employee who wants to make a securities or other financial transaction must first notify the TCO within the company. This is usually done by telephone or a written or e-mailed request. Once the TCO receives the request, the TCO compares the underlying security with a list of other companies with which the employee and/or the present company are currently involved. Some restricted transaction lists can be publicly available while others contain restrictions based on facts not known to the public.
The TCO is responsible for determining whether the employee can trade in the security. In making this determination, the TCO typically considers whether the company is involved with the security or the issuer, what position the employee holds, what confidential information the employee could be privy to, as well as other factors. Once this evaluation is complete, the TCO notifies the employee with the results of the compliance check. The TCO can indicate that the transaction is approved or that it violates one or more trading restrictions because the company is to closely involved in the underlying security and the employee's relationship with the company makes it inappropriate or illegal for them to transact in the security. In some instances, a transaction can be approved but only under limited circumstances. For example, the TCO may allow the employee to buy the security but only after a waiting period of thirty days. In general, however, the employee must wait until the TCO clears the proposed transaction before proceeding.
The process of examining and responding to the transaction requests is time consuming and can delay the employee from investing at opportune times. Often, most or all of the compliance checking is performed manually. This limits the number of transactions which can be evaluated in a given time. Often, it can be impossible to complete the transaction check prior to the execution of the transaction. This can result in the difficult situation of determining that a transaction is non-complying after the fact and having to back-out the transaction or take other corrective measures.
Some attempts have been made to automate the compliance process. Certain systems focus on determining whether a proposed transaction complies with limitations placed upon the contents of a given portfolio, such as legal restrictions or restrictions related to the goal of the portfolio owner. Such a system is disclosed in U.S. Pat. No. 5,893,079. The compliance system disclosed in the '079 patent is very basic and does not address the performance and other issues which must be addressed to implement a system that can handle compliance checking on trades that can be made by a large number of corporate employees, customers, or other relations, each of which may have different applicable compliance rules. Other systems are available to at least partially automate compliance checking for trades by employees and customers but these system also do not have an architecture or methodology which is well suited for high volume and fast response time while also providing a flexible implementation environment.